When investors hear the words “water treatment company”, one stock that comes to mind is Hyflux. Once upon a time, Hyflux was the local gem that showed a promising future. But no one would have imagined that Hyflux’s growth would end up hurting its financials, causing the company to suffer the ignominy of liquidation.
In February 2020, when another homegrown water treatment company Memiontec listed on the Singapore Exchange (SGX), investors were not particularly enamoured with companies from this industry. Hyflux had already been embroiled in a series of start-stops, twists and turns as one rescue or restructuring proposal was floated after another before eventually winding up in July.
Incorporated in 2013, Memiontec provides water treatment and wastewater management services across Indonesia, Singapore and China, while supplying water through transfer-own-operate-transfer (TOOT) and build-own-operate-transfer (BOOT) projects, which involve partnerships or joint ventures with public or private entities.
When The Edge Singapore first spoke to Tay Kiat Seng, Memiontec’s executive chairman and CEO last February, the company was focused on the Indonesian market. “With a large population, there are so many opportunities. And even if we just concentrate on Indonesia alone, we won’t be able to ‘eat finish’,” he said then, referring to a market demand bigger than Memiontec could fulfil.
Today, some 19 months after its IPO, the company has progressed on several fronts — while being careful to avoid the mistakes made by Hyflux. “We are not Hyflux. We do not tie up [our water treatment business] with our own component parts. We look at the process technology requirement and we approach trusted vendor partners whose components have been tried and tested in the market for decades,” says Low Kian Beng, executive director of Memiontec.
Tay adds: “When we listed on SGX, we already had one BOOT and one TOOT project in our portfolio, compared to Hyflux that only started its BOOT projects after it listed. We had to come up with our own funds for these projects that we built. So, we are confident in our own projects as we have put our own money into them prior to the IPO. But of course, there is a natural flow for the company to grow and so we needed to raise funds through an IPO for that.”
Tidal wave
Before the Covid-19 pandemic struck in February last year, Memiontec, which had been operating for about two decades then, had emerged profitable after going through two major financial crises, says Tay. But the pandemic was not something he could have predicted.
The pandemic did hurt the company’s revenue, as projects were delayed and higher costs incurred because of supply chain woes. Some of its workers were infected as well, causing further delays. “But we were still profitable throughout. If it was not for the pandemic, we would have shown higher growth [in FY2020],” says Tay.
In its FY2020 ended December 2020, Memiontec’s earnings saw a significant growth to $1.3 million from $0.3 million the previous year, while revenue increased by 18.1% y-o-y to $34.6 million.
The increase was mainly contributed by the increase in revenue from the company’s total solutions with engineering, procurement and construction (TSEPC) segment, which increased by $8.11 million, up 41.47% from FY2019.
The increase was partially offset by the decrease in its operations, maintenance and services (OMS) segment by 25.57% from the previous year. Its sales and distribution of systems and trading (SDS) was down by 54.0% from FY2019.
The higher TSEPC revenue was due mainly to higher value contracts (such as Project Tuas South Desalination Plant, Project Jurong Water Reclamation Plant and Project Blue Energy at Changi Water Reclamation Plant) secured in FY2019, and substantially carried out during FY2020.
The decrease in OMS revenue was mainly attributable to completion of a major OMS contract in the third quarter of FY2020, partially offset by the OMS revenue generated from the long-term OMS service rendered to the water treatment facility operated by Memiontec’s joint venture company, Jakpro Memiontec Air, since its commercial operations in December 2019. The drop in SDS revenue was mainly due to the absence of revenue from higher value trading contracts in the year.
Prior to its IPO, Memiontec’s revenue contribution from its Indonesia market was the highest at 58% of total revenue in FY2018 and 39% from Singapore. But in FY2020, the proportions have changed, with Singapore representing 80% of the total revenue and 19% from Indonesia.
“Our revenue from the Singapore market did increase, but so did Indonesia. It is just that Singapore grew faster. Looking at profits, Indonesia is still higher than Singapore, because the margins there are high, as Singapore projects are much more competitive,” says Tay.
In FY2020, the board also declared a final dividend of 0.185 cents, higher than 0.115 cents in the previous year.
As the company is considered an essential service provider in Singapore and Indonesia, it was allowed to continue its operations throughout the pandemic, albeit at a lower capacity and with stringent safety measures.
The company seems to have gained some earnings growth momentum. In its latest 1HFY2021 ended June results, Memiontec recorded earnings of $480,000, a significant increase from just $21,000 a year ago. This came on the back of an 86.1% y-o-y increase in revenue to $26.9 million.
“We are quite optimistic about our performance and if everything goes well, with little disruptions to our work, we expect to remain profitable and show some growth too,” says Tay, referring to the rest of FY2021.
Memiontec is also lightly geared, with lease liabilities of $220,000 as at June 30 and bank loans of $4.36 million, versus shareholders’ equity of around $17 million.
As a signal of the company’s confidence, it has indicated a policy of giving out a quarter of its net profit for FY2021. “We intend to maintain that or improve it,” adds Tay, who holds around a stake of 65% in the company.
Trading of Memiontec shares have picked up in recent weeks. On Sept 14, it surged by as much as 15%, and in response to queries by the SGX, the company said it is in compliance. As at Sept 29, shares in Memiontec have risen 125.0% since its IPO in February 2020, giving it a market capitalisation of $117.8 million and a P/E of 66.7 times.
Rising tide
As at Aug 30, Memiontec’s order book stands at $91.6 million. Based on its order book, of which 50% of the projects are in Singapore and the other 50% in Indonesia, the company expects to record a revenue of at least $45 million for FY2021 and $47 million for FY2022.
However, Memiontec’s order book value only includes its TSEPC projects, which are one-off projects. The company can expect recurring revenue from the sale of treated water and OMS services. Hence, revenue for FY2021 and FY2022 should be higher than what is estimated based on the order books.
Already, since its IPO, Memiontec has added another BOOT project in Pekanbaru, Riau, Indonesia, into its portfolio. Construction on this project has started and is expected to complete in 2026. For this project, it will be expanding and upgrading the existing facility that it acquired. For now, sale of water (SOW) from this facility is only from the existing facility that was originally acquired. The volume of SOW is expected to increase in 2026 once the new facility is completed.
For Memiontec’s BOOT and TOOT projects, it will own these water treatment facilities for 25 years, after which the respective government will reclaim ownership of the facility or may extend the group’s contract. On top of that, with the BOOT and TOOT projects, the company will continue to generate a steady revenue stream selling water and providing maintenance services.
The recurring revenue is then used to help pay down project financing loans for various BOOT and TOOT projects. The loan term usually lasts 7–8 years and according to Tay, after the regular loan repayments, the company will still be profitable. Once the project loans are fully paid, Memiontec will see much better bottomline numbers.
Looking forward, Tay wants to keep growing the order book and to start tendering for larger-scale projects, while looking for other regional markets to go into. Vietnam, for one, interests him. However, due to travel restrictions still in place due to the Covid-19 pandemic, the group is not able to provide more information on their potential expansion into this market.
According to Tay, he is not concerned about expanding too much too fast. He has engaged the services of management consulting firm McKinsey & Co for support and advice. The consultancy fees are partly paid by the government as part of Enterprise Singapore (ESG)’s Scale-up SG programme, in which Memiontec is one of the participating companies.
The Scale-up SG programme aims to help local high-growth companies scale rapidly and become global champions in their respective fields. Through this programme, Tay is working with appointed consultant McKinsey & Co on the company’s strategic expansion plans.
Tay is upbeat that the company will see better days. He aspires to grow the bottomline and market value of the company, and make the leap from Catalist, where it is listed now, to the Mainboard. “Water is a commodity that is needed in all parts of the world. This industry has never been a sunset industry and never will be. Our only issue in the future is to worry about how to scale up in this sunrise industry,” he says.
Photo: The Edge Singapore/ Albert Chua
